GIFT  OF 


*** 


rc 

** 


NOV  39  I9t* 


Governmental  Regulation 


of 


Common  Carriers  by  Railroad 


An  Address 


Delivered  Before  The 


Graduate  School  of  Business  Administration 


of 


Harvard  University 


UNIVERSITY 

P  OF 

-  rpo 


By  George  Stuart  Patterson 


April  4,  1916 


I    V  A-  \  O 


Governmental  Regulation  of  Common 
Carriers  by  Railroad 

"Regulation  is  not  intended  to  be  a  mere 
wanton  exercise  of  pozver.  It  is  a  restriction  upon 
the  management  of  the  railroads.  It  is  induced 
by  the  public  interest  or  safety."* 

The  railroad  transportation  plant  of  the  United 
States  comprises  250,000  miles  of  line,  which  with 
double  tracks,  yards  and  sidings,  approximates  376,000 
miles  of  track. 

The  capital  securities,  that  is,  the  stock  and 
funded  debt  of  these  companies,  which  were  outstand- 
ing in  the  hands  of  the  public  on  June  30,  1914, 
amounted  to  approximately  $15,719,692,925^  of 
which  probably  sixty  per  cent,  were  bonds  and  other 
forms  of  indebtedness,  and  forty  per  cent,  was  stock, 
the  latter  being  owned  by  over  six  hundred  and  twenty 
thousand  stockholders.  Insurance  Companies  with 
their  thirty-four  millions  of  policies  outstanding,  and 
Savings  Banks  with  their  ten  million  seven  hundred 
thousand  depositors,  hold  probably  over  ten  per  cent, 
of  these  securities. 


*  Per  Mr.  Justice  McKenna  in  Erie  R.  R.  vs.  New  York,  233 
U.  S.  671,683. 

f  Includes  only  railroads  with  annual  operating  '  revenues  over 
$100,000. 


Z  29 


During  the  year  ending  June  30,  1914,  the  operat- 
ing revenues*  of  the  railroads  amounted  to  $3,047,- 
019,908,  their  operating  expenses  to  over  $2,200,000,- 
ooo  and  their  net  operating  income  to  $675,511,552, 
while  the  number  of  their  employees  for  the  year  end- 
ing June  30,  1914,  was  1,695,483^  and  the  compen- 
sation of  such  employees  aggregated  $1,373,422,472. 

During  the  same  .period  of  time  these  Carriers 
paid  in  taxes  over  $140,000,000. 

That  the  people  of  the  United  States  have  a  vital 
interest  in  the  efficiency  of  their  system  of  railways  is 
self  evident.  It  is  obviously  essential  to  our  welfare, 
economic  and  otherwise,  that  we  have  adequate  rail- 
road facilities,  i.  e.,  sufficient  track,  stations,  equip- 
ment and  other  facilities  properly  maintained  and 
efficiently  operated,  and  that  the  charges  for  the  use 
of  such  facilities  shall  not  only  be  nondiscriminatory, 
but  shall  also  be  just,  reasonable  and  compensatory. 

It  is  equally  clear  that  sound  public  policy  requires 
that  there  shall  be  governmental  control  and  regula- 
tion of  railroad  charges,  and  possibly  of  other  features 
of  railroad  transportation,  and  that  such  control  should 
be  exercised,  not  by  statute  laying  down  a  hard  and 
fast  rule  and  affording  no  play  to  varying  conditions, 
but  through  a  body  of  experts,  under  a  salary  sufficient 

*  Includes  only  railroads  with  annual  operating  revenues  over 
$100,000. 

t  The  number  of  employees  for  the  year  ending  June  30,  1913,  was 
1,813,289,  and  the  reduction  in  number  in  1914  was  due  to  the  decrease 
in  business  and  rigid  economies  forced  upon  the  railroads  by  their 
diminishing  net  income. 


to  attract  men  of  the  widest  experience,  and  with  such 
tenure  of  office  as  would  render  them  free  from  polit- 
ical influence  of  any  kind. 

A  fair  example  of  another  kind  of  regulation,  i.  e., 
by  statute,  is  found  in  the  extra  crew  laws  of  the 
various  States.  The  extra  crew7  law  makes  the  num- 
ber of  trainmen  on  a  train  depend  solely  upon  the  num- 
ber of  cars  in  the  train,  irrespective  of  the  character 
of  service  performed  by  such  train.  For  example ;  one 
of  the  usual  types  of  this  law  requires  a  greater  num- 
ber of  trainmen  on  trains  consisting  of  four  or  more 
passenger  coaches,  and  on  freight  trains  of  thirty  or 
more  cars,  than  is  required  by  trains  of  a  lesser  num- 
ber of  cars,  thus  ignoring  the  fundamental  considera- 
tion that  the  number  of  trainmen  should  depend  not 
upon  the  number  of  cars  but  upon  the  character  of 
the  service  performed  by  that  train,  whether  through, 
or  local,  the  amount  of  switching  required,  the  condi- 
tions under  which  the  switching  is  performed,  and  the 
differences  in  grade  over  which  trains  are  run.* 

Another  example  of  vicious  regulation  by  statute 
is  the  two-cent  passenger  fare  law  passed  by  many 
of  the  States,  which  ignores  entirely  the  cost  of  the 
passenger  service,  and  affords  no  opportunity  for  a 
proper  increase  in  fare  to  take  care  of  the  large  in- 
creases in  the  expenses  of  passenger  transportation, 
which  have  taken  place  in  recent  years. 


*  See   report  of  New  Jersey   Public  Utility   Commission,  January 
23,  1912. 

z  29 


34345?  J 


It  would  seem  clear  also,  that  a  body  of  experts 
necessary  to  efficiently  carry  out  these  processes  of 
regulation,  should  be  an  administrative  body,  and  not 
a  Court. 

The  problems  incidental  to  railroad  regulations 
are  Essentially  administrative,  and  not  judicial,  for 
they  involve  (as  has  been  frequently  pointed  out  by 
the  Interstate  Commerce  Commission)  not  merely  the 
respective  interests  of  the  complainant  and  of  the 
defendant  railroad  company,  but  involve  also  the  para- 
mount interests  of  the  community,  which  may  be  sub- 
stantially affected  by  the  controversy. 

For  example:  A  controversy  between  X,  whose 
mine  is  located  in  the  Pocahontas  District  in  West 
Virginia,  and  the  Norfolk  &  Western  Railway  Com- 
pany serving  that  district,  as  to  the  rate  to  be  charged 
on  bituminous  coal  shipped  from  Xfs  mine  to  Norfolk 
for  subsequent  transshipment  by  water,  involves 
something  more  than  the  isolated  question  of  the  value 
to  X  of  that  transportation  service  and  the  reason- 
ableness of  the  charge  therefor. 

Such  a  controversy,  by  reason  of  competitive  con- 
ditions in  the  bituminous  coal  industry  of  the  East 
involves  amongst  other  things : 

(a)  Rates  from  all  other  mines  on  the  Norfolk 
&  Western  Railway  in  the  Pocahontas   District  to 
Norfolk,  for  transshipment  by  water. 

(b)  Rates  from  mines  in  the  New  River  District 
on  the  Chesapeake  &  Ohio  Railway  and  from  mines 


on   the   Virginian   Railway   to   Newport   News    and 
Sewells  Point,  for  transshipment  by  water. 

(c)  Rates  from  mines  in  the  Cumberland-Pied- 
mont,   Myersdale,    Austen-Newburg    and    Somerset 
Districts  on  the  Baltimore  &  Ohio  and  on  the  Western 
Maryland  Railroads  in  the  States  of  West  Virginia 
and  Pennsylvania,  to  Baltimore  and  Philadelphia  for 
transshipment. 

(d)  Rates  from  the  mines  on  the  Pennsylvania 
Railroad,  New  York  Central  Railroad,  and  Buffalo 
Rochester   and   Pittsburgh   Railroad,    in   the   Clear- 
field  District  in  the  State  of  Pennsylvania  to  Baltimore 
and  Philadelphia  for  transshipment. 

(e)  The  all-rail  rates,  from  mines  on  the  Balti- 
more &  Ohio  Railroad,  Pennsylvania  Railroad,  New 
York  Central,  and  Buffalo,  Rochester  &  Pittsburgh 
Railway  into  New  England. 

This  apparently  simple  controversy,  therefore,  be- 
tween one  coal  company  and  the  Norfolk  &  Western 
Railway  Company,  affects  directly  and  indirectly  the 
commercial  prosperity  of  all  the  bituminous  coal  fields, 
from  which  bituminous  coal  is  shipped  to  the  East  for 
local,  coastwise,  or  export  trade,  and  of  all  the  large 
railroad  systems  engaged  in  that  traffic,*  and  may  also 
determine  the  extent  to  which  coal  traffic  shall  move 
through  the  competing  ports  of  Norfolk,  Lambert's 

*  This  traffic  is  so  large  that  its  diversion  would  seriously  affect 
the  prosperity  of  some  of  these  companies. 


Point,  Baltimore  and  Philadelphia  for  transshipment 
by  water  to  New  England. 

Is  such  a  controversy  one  which  can  properly  be 
settled  in  a  court  of  law,  in  a  proceeding,  in  which  the 
only  necessary  parties,  would  be  X  and  the  Norfolk  & 
Western  Railway  Company  ? 

A  court  of  law  is  necessarily  restricted,  in  the 
determination  of  an  issue,  to  the  evidence  before  it, 
together  with  the  few  facts  of  which  a  court  may  take 
judicial  notice,  and  the  court  can  only  determine  the 
issue,  as  presented  by  the  parties. 

As  Mr.  Acworth  has  pointed  out,*  railway  ques- 
tions are  largely  questions  of  discretion  and  commer- 
cial instinct,  "and  they  are  absolutely  unsuitable  for 
determination  by  the  positive  methods  of  the  law  court 
with  its  precisely  defined  issues,  its  sworn  evidence, 
and  its  rigorous  exclusion  of  what,  while  the  lawyer 
describes  it  as  irrelevant,  is  often  the  precise  class  of 
consideration  which  would  determine  one  way  or 
other  the  decision  of  the  practical  man  of  business." 

An  administrative  body,  on  the  other  hand,  can 
and  should  force  the  production  of  other  evidence, 
and  will  consider  the  effect  of  their  decision  on  other 
persons,  and  other  localities,  not  parties  to  the  pro- 
ceeding, and  is  not  hampered,  therefore,  by  the  lack 
of  proof  which  may  be  presented  by  the  contending 
parties. 

*The   Relation   of   Railroads   to   the   State    (page    12)    by   W.   M. 
Acworth. 


Our  railways  are  national  in  character,  that  is  to 
say,  the  direct  and  immediate  effect  of  their  activity 
is  not  confined  to  the  locality  or  localities  in  which 
those  activities  may  be  exercised. 

The  commercial  competition  of  points  of  pro- 
duction is  such  in  this  country,  that  the  action  of  a 
railroad  company  in  one  portion  of  the  country  may 
seriously  affect  the  economic  development  of  an- 
other portion  of  the  country.  For  example: 

The  competition  between  flour  milled  at  Minne- 
apolis, Kansas  City,  Chicago,  Milwaukee,  Buffalo 
and  various  points  through  Ohio  and  Indiana  is  of 
such  a  character  that  a  change  in  the  rates  from  one 
of  those  territories  to  the  Atlantic  Seaboard  neces- 
sarily affects  the  ability  of  the  other  producing 
points  to  compete  in  the  Eastern  markets. 

So,  also,  intra-state -rates  on  raw  material  to 
important  points  of  production,  or  rates  on  finished 
material  to  important  points  of  consumption,  may 
affect  the  ability  of  points  of  production  in  other 
States  to  compete  in  common  markets. 

State  action  making  unduly  low  rates,  freight 
or  passenger,  or  State  action  unduly  increasing  the 
operating  expenses  of  a  railroad  company,  throws  a 
direct  and  immediate  burden*  upon  the  entire  traffic 
and  operation  of  that  company,  which  is  reflected  in 
its  inability  to  properly  serve  the  people  in  other 

*  See  "The  conflict  between  State  and  Federal  Regulation  of  Rail- 
roads" by  Walker  D.  Hines,  published  in  the  Annals  of  the  American 
Academy  of  Political  and  Social  Science  for  January,  1916. 
Z  29 


8 

States,  or  by  compelling  them  to  pay  higher  charges 
than  they  would  otherwise  be  compelled  to  pay. 

One  of  the  primary  reasons*  for  the  adoption  of 
our  Federal  Constitution  was  the  burden  imposed 
upon  our  commerce  as  a  whole,  by  the  conflicting 
regulations  of  the  different  States,  and  it  was  to 
eliminate  that  burden,  that  the  exclusive  power  to 
regulate  interstate  commerce  in  matters  of  national 
concern,  was  taken  away  from  the  States  and  vested 
in  the  Congress  of  the  United  States. 

One  of  the  tests,  which  the  Supreme  Court  of 
the  United  States  has  laid  down,  for  the  purpose  of 
determining  whether  any  subject  of  interstate  com- 
merce is  of  national  concern  is  the  answer  to  the 
question — does  the  subject  require  uniformity  of  treat- 
ment? If  it  does  it  is  national  in  character,  and  as  such 
can  be  only  dealt  with  by  the  national  legislative  body.f 

Railroad  regulation  is  a  subject  which  requires 
that,  in  its  exercise,  there  shall  be  no  discrimination 
in  favor  of  the  products  or  people  of  particular  states, 
and  that  the  body  which  is  to  enforce  such  regulation, 
shall  have  a  broad  comprehensive  knowledge  of  the 
necessities  and  requirements  of  the  entire  country. 
It,  therefore,  follows  that  there  must  be  uniformity 
of  action,  and  such  uniformity  of  action  can  only  be 
secured  through  the  medium  of  one  central  body 
responsible  to  the  entire  country,  and  not  through 

*  Critical  Period  of  American  History  (page  144)  by  James  Fiske. 
f  Minnesota   Rate   Cases,  230  U.   S.   352,  401,  402. 


the  medium  of  the  representatives  of  48  States,  who 
are  responsible  only  to  their  respective  constituencies. 

If  then  our  governmental  regulation  is  to  be 
affected  by  and  through  an  administrative  body, 
what  is  to  be  the  personnel  of  that  body,  and  their 
tenure  of  office? 

It  will  hardly  be  doubted  that  the  problems  inci- 
dental to  railroad  regulation  are  fundamentally 
difficult,  and  their  proper  solution  calls  not  only  for 
industry  and  intelligence,  but  also  for  the  posses- 
sion and  exercise  of  that  knowledge  and  imagination 
which  can  foresee  the  economic  effect  of  the  rate 
structure  under  consideration. 

Let  us  assume  that  the  administrative  body  has 
before  it,  the  question  as  to  the  rates  on  coal,  or  ore, 
or  limestone,  to  any  of  the  iron  furnace  districts 
east  of  Chicago,  or  the  rates  on  the  finished  product 
from  such  furnaces  to  the  great  competitive  mar- 
kets in  the  East. 

The  decision  of  this  question  might  call  for  a 
consideration  of  the  extent  of  the  competition  be- 
tween Cleveland,  the  Mahoning  and  Shenango  Val- 
leys and  Pittsburgh  as  points  of  manufacture,  or  the 
competition,  if  any,  between  the  bee-hive  coke  manu- 
factured in  ovens  in  the  Connellsville  District  in  Penn- 
sylvania, in  the  Pocohontas  District  in  West  Virginia 
and  that  produced  in  by-product  ovens  at  other  points. 
The  Commission  might  have  to  consider  the  relative 
freight  rates  from  the  Atlantic  Seaboard,  on  ore  im- 


10 

ported  from  South  America  and  Sweden,  as  compared 
with  the  rates  on  ore  mined  in  the  States  of  Minnesota 
and  Wisconsin,  and  before  they  had  finished  their 
labors,  they  might  be  called  on  to  remember  that  the 
furnaces  in  the  States  of  Alabama  and  Tennessee,  by 
reason  of  their  cheap  labor  and  their  proximity  to  the 
sources  of  their  supply  of  raw  material,  can  and  do  ship 
pig  iron  to  New  England  in  competition  with  furnaces 
located  at  eastern  points  and  in  Northern  New  York. 

The  solution  of  such  a  question,  might  deter- 
mine conclusively,  the  economic  future  of  any  of 
these  points  of  production. 

The  Commission  would  also  have  to  keep  before 
them,  the  effect  of  the  tonnage  and  the  rates  under 
consideration,  upon  the  revenues  of  the  carriers, 
for  as  the  Interstate  Commerce  Commission  said  in 
the  1910  Rate  Case  (20  I.  C.  C,  at  pages  262,  263) : 

"Our  railroads  must  be  maintained  in  a 
high  state  of  efficiency.  This  the  public  in- 
terest demand.  Commerce  and  industry  cannot 
afford  to  wait  on  transportation  facilities.  Our 
rates  should  be  such  as  to  render  possible  a 
high-class,  not  an  extravagant,  service.  *  *  * 

"It  is  generally  conceded  that  within  the  next 
few  years,  if  our  means  of  transportation  by  rail 
are  to  keep  pace  with  the  calls  upon  them,  very 
large  sums  must  be  expended  in  the  way  of  new 
construction  and  new  equipment.  While  some 
small  portion  of  this  may  come  from  current  earn- 
ings, the  great  bulk  must  be  new  capital,  and  this 
capital  must  be  obtained  from  the  investing  public. 


II 

"If,  therefore,  we  are  to  rely  in  the  future, 
as  we  have  in  the  past,  upon  private  enterprise 
and  private  capital  for  our  railway  transportation, 
the  return  must  be  such  as  will  induce  the  invest- 
ment. It  is  therefore  not  only  a  matter  of  justice, 
but  in  the  truest  public  interest,  that  an  adequate 
return  should  'be  allowed  upon  railway  capital." 

Our  administrative  body  then  must  be  composed 
of  men  of  ability  and  foresight,  with  a  thorough  knowl- 
edge of  the  subject,  and  they  must  receive  a  compensa- 
tion commensurate  with  their  ability  and  responsibility. 

Furthermore,  their  term  of  office  must  be  of 
such  length,  as  to  make  the  position  the  life-work 
of  the  applicant,  and  thus  remove  the  political  in- 
fluence incident  to  a  short  term  of  office. 

As  preliminary  then  to  our  discussion  of  the 
subject  we  W7ill  consider  these  propositions  as  settled: 

(a)  Public  policy  requires  that  there  shall  be 
efficient  governmental  regulation  of  common  car- 
riers by  railroad. 

(b)  Efficient  regulation  requires  a  careful  and 
exhaustive  examination  of  the  subject,  by  a  trained 
body  of  experts,  and  accordingly  no  regulation  by 
statute  can  be  efficient. 

(c)  The  questions  incidental  to  regulation  are 
largely  administrative  and  are  not  judicial  in  their 
nature.     They  involve  not  simply  the  interest  of  the 
particular  litigant  in  the  particular  issue,   but  they 


12 

necessarily  affect  other  important  issues  and  the  inter- 
ests of  many  persons  and  localities  not  parties  to  the 
controversy.  They  must  he  settled,  in  the  first  in- 
stance by  an  administrative  body,  and  not  by  a  court. 

(d)  The  economic  effects  of  the  decisions  of 
this  administrative  body  or  Commission,  are  so  im- 
portant   and    far-reaching,    that    the    Commission 
must  be  composed  of  men  who  are  making  the  sub- 
ject their  life  study,  and  who  shall  receive  adequate 
compensation  for  their  services,  and  whose  tenure 
of  office  shall  be  so  long  as  to  be  entirely  free  from 
all  political  influence  of  any  description. 

(e)  Railroad  regulation  fundamentally  affects 
questions  of  national  importance*  which  require  uni- 
formity of  treatment.     Such  regulation  should  not  be 
any  more  subject  to  State  action,  than  our  tariff,  cur- 
rency, or  the  operations  of  the  Post  Office  Department. 

Let  us  examine  the  present  method  of  regula- 
tion, and  see  how  far  it  conforms  to  the  principles 
which  have  been  outlined  as  a  basis  for  efficiency. 

As  Mr.  Samuel  Rea,  President  of  the  Pennsyl- 
vania Railroad  Company,  said  in  his  address  to  the 
Chamber  of  Commerce  of  New  York  on  December  3, 
1914:  "The  time  is  ripe  for  suggestions  concerning 
constructive  railroad  regulation  and  policy,"  and  it  is 


*  See  an   address  by   Frank   Trumbull   entitled   "Railway    Service : 
Is  it  a  National   Problem  or  a  Local  Issue?" 


13 

upon  the  suggestions  made  by  him  at  that  time,  that 
the  views  expressed  in  this  paper  are  primarily  based. 
Governmental  regulation,  as  at  present  consti- 
tuted, involves  the  use  of  many  regulating  agencies, 
all  operating  at  the  same  time  upon  such  common  car- 
riers by  railroad  as  come  within  their  jurisdiction  and 
as  Mr.  Acworth  says:*  "it  is  only  to  be  regretted  that 
the  quantity  of  the  law  errs  as  much  on  the  side  of 
excess  as  its  quality  on  the  side  of  deficiency/' 

Those  regulating  agencies  are: 

(a)  The  Interstate  Commerce  Commission,  act- 
ing under  the  authority  of  the  Interstate  Commerce 
Act,  its  amendments  and  supplements. 

(b)  Acts  of  Congress  fixing  compensation  for 
carrying  the  mails. 

(c)  Action  of  Arbitration  Commissioners  under 
the  terms  of  an  Act  of  Congress. f 

(d)  State  Public  Service  Commissions,  operat- 
ing under  the  terms  of  the  Public  Service  laws  of  their 
respective  States. 

(e)  Acts  passed  by  State  legislatures,  establish- 
ing certain  rates,  freight  and  passenger,  or  prescribing 
operating  conditions. 

It  may  tend  to  clarity  of  discussion  to  consider 
these  methods  in  the  reverse  order  of  their  statement. 


*The  Relation  of  Railroads  to  the  State  by  W.  M.  Acworth. 
fAct  of  July   15,   1913. 


I.  ACTS  PASSED  BY  STATE  LEGISLATURES 
ESTABLISHING  RATES,  FREIGHT  AND 
PASSENGER,  OR  PRESCRIBING  OPERAT- 
ING CONDITIONS 

A.     State  statutes  establishing  passenger  and  freight 

rates 

Examples  of  these  statutes,  so.  far  as  passenger 
fares  are  concerned,  are  the  two-cent  maximum  fare 
laws  of  Minnesota,  Ohio,  Indiana,  Illinois  and  West 
Virginia. 

In  freight  cases,  reference  may  be  made  to  the 
Maximum  Freight  law  of  Minnesota  (Minnesota  Rate 
Cases,  230  U.  S.,  352),  to  the  North  Dakota  Lignite 
Rate  Law  (Northern  Pacific  vs.  North  Dakota,  236 
U.  S.,  585),  and  to  the  rates  established  by  the  State 
of  North  Carolina,  under  the  Act  of  October  13,  1913, 
(Royster  Co.  vs.  R.  R.  Co.,  38  I.  C.  C,  190). 

As  heretofore  pointed  out,  the  fundamental  vice 
of  the  two-cent  passenger  fare  law  is,  that  the  rates 
fixed  thereby,  do  not  bear  the  slightest  relation  to 
either  the  cost  or  value  of  the  service. 

This  rate  was  fixed  by  the  State  Legislatures 
without  the  slightest  examination  into  the  cost  of  the 
passenger  service,  utterly  ignoring  the  fact  that  a 
large  portion  of  the  passenger  business  (the  commuta- 
tion service)  is  being  transacted  at  less  than  2  cents  a 
mile,  and  that  the  practical  requirements  of  the  com- 
mutation traffic  would  not  permit  its  rates  to  be  raised 


15 

to  the  maximum  amount  required  by  the  statute. 
These  statutes  further  ignored  the  fact  that  the  cost 
of  transporting  passengers  was  increasing  year  by 
year,  and  thus  operated  to  prevent  the  carrier  from 
raising  its  passenger  rates  to  meet  the  burden  of  such 
increase  in  costs. 

That  such  costs  have  been  increasing  in  recent 
years  will  appear  from  the  opinion  in  the  "Five  Per 
cent.  Case''  where  the  Commission  said  (31  I.  C.  C, 
350: 

"The  unit  of  cost  of  moving' certain  kinds  of 
bulk  freight  carried  in  large  volume  appears  to 
have  been  reduced  by  more  efficient  operating 
methods  despite  increases  in  the  rate  of  wages; 
on  the  other  hand,  the  unit  cost  of  moving  passen- 
gers has  been  almost  uniformly  increased,  inde- 
pendently of  the  effect  of  wage  advances,  through 
the  use  of  heavier  equipment,  the  adoption  of 
safety  devices,  and  better  service."  (Page  387.) 
"We  know  of  no  provision  of  law  under 
which  we  should  be  justified  in  increasing  freight 
rates  to  provide  a  return  upon  property  used  ex- 
clusively in  the  passenger  service,  much  less  to 
take  care  of  losses  incurred  in  such  service.  In 
our  opinion  each  branch  of  the  service  should  con- 
tribute its  proper  share  of  the  cost  of  operation 
and  of  return  upon  the  property  devoted  to  the 
use  of  the  public."  (Page  392.) 

In  the  Western  Passenger  Case,  (37  I.  C.  C.,  i), 
the  Commission  said  (Page  41)  : 

Z  29 


i6 

"The  evidence  in  this  case  has  shown: 

"Substantial  improvements  in  the  passenger 
service  have  been  made  since  1900  at  large  ex- 
pense to  carriers,  resulting  in  a  greater  degree  of 
comfort,  convenience,  and  safety  to  the  traveling 
public. 

"The  conditions  under  which  the  passenger 
service  is  performed  do  not  admit  of  all  the  cor- 
responding economies  in  operation  that  have 
been  effected  in  the  freight  service. 

"The  increased  cost  of  service  due  to  greater 
costs  of  labor,  materials,  and  taxes  not  offset  by 
corresponding  economies  which  are  practicable  in 
operation,  is  entitled  to  consideration." 

The  Supreme  Court  of  the  United  States  in  speak- 
ing of  the  two-cent  fare  law  of  one  state  said,  (Nor- 
folk &  Western  Railway  Co.  vs.  West  Virginia,  236 
U.  S.,  605,  614) : 

"It  is  clear  that  by  the  reduction  in  rates  the 
company  is  forced  to  carry  passengers,  if  not  at 
or  below  cost,  at  merely  a  nominal  reward  con- 
sidering the  value  of  the  traffic  affected." 

It  is  also  interesting  to  note  that  in  some  of  the 
States  in  question,  the  Interstate  Commerce  Commis- 
sion has  permitted  interstate  rates  to  go  into  effect 
which  are  on  a  higher  basis,  than  the  rates  fixed  by  the 
State  statutes,  and  has  also,  in  a  litigated  case,  declined 
to  recognize  the  rate  fixed  by  the  State  statute,  as  evi- 
dence of  the  unreasonableness  of  the  higher  rate  appli- 


17 

cable  to  interstate  transportation  in  that  locality. 
Trier  vs.  Railway  Company,  30  I.  C.  C,  352. 

So,  also,  in  a  recent  case  the  Interstate  Commerce 
Commission  have  declined  to  take  freight  rates  fixed 
by  the  Minnesota  statute  as  the  measure  of  reasonable 
interstate  rates  in  that  State.  Holmes  vs.  Hallowell 
vs.  Ry.  Co.,  37  I.  C.  C.,  627. 

Another  example  of  State  legislative  freight 
rates,  will  be  found  in  Chapter  51  of  the  laws  of  1907 
of  the  State  of  North  Dakota,  fixing  maximum  intra- 
state  rates  for  the  transportation  of  lignite  coal. 

The  Supreme  Court  of  that  State  found  as  a  fact 
that  as  to  one  railroad  company,  the  rate  in  question 
"is  slightly  remunerative,  but  in  fact  non-compensa- 
tory, considering  the  volume  of  freight  carried  and  the 
property  of  the  railroad  devoted  thereto."  (26  North 
Dakota,  page  439.) 

As  to  another  company  that  same  Court  found 
"that  the  carriage  of  lignite  coal  by  the  'Soo'  Line 
within  this  State  during  said  fiscal  year  was  not  only 
non-profitable,  but  occasioned  a  loss  to  it  when  its 
fixed  expenses  apportionable  to  all  traffic  are  in  proper 
proportion,  an  amount  assigned  to  and  charged 
against  the  earnings  from  this  commodity/7  (26 
North  Dakota,  439.) 

The  State  insisted*  that  the  statute  could  be  sup- 
ported as  a  matter  of  public  policy  in  that  it  was  to  aid 

*Nor.  Pac.  Ry.  vs.  North  Dakota,  236  U.  S.  585,  598. 


iS 

in  the  development  of  a  local  industry,  and  thus  confer 
a  benefit  upon  the  people  of  the  State. 

It  may  be  sound  public  policy,  to  develop  a  partic- 
ular industry,  in  a  particular  State.  That  is  a  matter 
for  that  State  to  decide,  but  no  one  will  be  heard  to 
suggest  that  the  people  of  one  State  should  be  taxed 
for  the  benefit  of  an  industry  located  in  another  State. 
Yet  that  is  the  practical  effect  of  State  statutes  which 
establish  unremunerative  freight  and  passenger  rates, 
the  loss  to  the  carrier  being  shifted  (at  least  in  part) 
to  the  people  and  traffic  of  other  States. 

It  has  been  estimated  (Five  Per  cent.  Case,  31 
I.  C.  C,  351,  375),,that  the  effect  of  the  reduction  in 
passenger  fares  in  Ohio,  Indiana,  Michigan  and  Illi- 
nois by  State  statute  was  to  cause  a  loss  in  revenues  to 
ten  of  the  carriers  affected,  of  nearly  $18,000,000  for 
the  period  between  1906  and  1913,  which  loss  has 
imposed  a  burden  either  in  rates  or  in  impairment  of 
service  upon  the  traffic  and  people  of  other  states. 

B.     State  legislation  affecting  operating  conditions. 

In  addition  to  the  burden  which  has  been  imposed 
upon  the  people  of  the  United  States,  by  the  passage 
of  State  laws  prescribing  maximum  freight  and  pas- 
senger rates,  there  is  also  the  economic  injury  inflicted 
upon  the  entire  country  by  the  passage  of  State  laws 
regulating  the  details  of  railroad  operation. 

In  the  year  1913,  1395  bills,  regulating  the  details 
of  practical  operation  of  railroads,  were  introduced  in 


'9 

the  legislatures  of  the  various  States  then  in  session. 
Two  hundred  and  thirty  of  these  bills  were  enacted 
into  law.  Amongst  these  laws  were  acts  regulating 
the  hours  of  service,  time  of  payment,  terms  of  em- 
ployment of  employees,  rules  for  flagging  trains, 
prescribing  kind  of  headlight,  equipment  of  passen- 
ger trains,  speed  of  livestock  and  other  freight 
trains,  protection  and  elimination  of  grade  cross- 
ings, equipment  of  all  stations  and  shops. 

In  his  recent  and  very  convincing  address  on 
this  subject,  before  the  State  Bar  Association  of 
Tennes-see,  Mr.  Alfred  P.  Thorn  said: 

"Three  States  have  passed  laws  making  it 
illegal'  for  a  Carrier  having  repair  shops  in  such 
State  to  send  any  of  its  equipment  which  it  is 
possible  to  repair  there,  out  of  the  State.  Fif- 
teen States  have  attempted  to  secure  prefer- 
ential treatment  of  their  State  traffic  by  heavy 
penalties  for  delay  in  movement.  Twenty 
States  have  extra  crew  laws.  Twenty-eight 
States  have  headlight  laws  with  varying  re- 
quirements as  to  character  of  lights." 

In  the  year  1915  there  were  introduced  in  the 
State  Legislature  then  in  session,  1097  bills  directly 
regulating  railroad  operation,  of  which  137  were  en- 
acted into  law.  Amongst  those  enacted  into  law  were 
bills  regulating  the  size  of  crews,  the  hours  of  service, 
the  character  of  headlights  and  other  appliances  on 
equipment,  the  speed  of  freight  trains,  the  stops  of 


20 

passenger  trains,  the  installation  of  signals,  elimina- 
tion of  grade  crossings,  the  location  of  stations,  etc.* 

It  will  hardly  be  contended  that  a  legislative 
body  has  or  can -acquire  the  technical  knowledge 
necessary  to  enact  legislation  of  this  kind.  The 
most  scientific  method  of  regulating  (if  the  subject 
be  one  which  requires  regulation)  such  matters, 
would  seem  to  be  by  action  by  a  Commission  after  a 
careful  investigation  of  the  facts,  an  investigation 
which  cannot  be  made  by  a  legislature,  on  account 
of  other  necessary  demands  upon  its  time. 

Indeed,  many  of  the  States  which  enacted  the 
laws  referred  to,  possessed  Public  Service  Commis- 
sions with  ample  power  to  deal  with  the  situations 
covered  by  the  bills. 

But  careful  investigation  of  the  subject,  by  a 
body  of  experts,  is  not  desired  by  the  interests 
which  seek  the  passage  of  laws  of  this  character. 

In  1911  the  Public  Utility  Commission  of  New 
Jersey  was  directed  by  the  Senate  of  that  State  to 
advise  as  to  the  propriety  of  the  passage  by  the 
Legislature  of  an  extra  crew  law. 

After  a  careful  consideration  and  hearings,  at 
which  the  labor  organizations  were  fully  represented, 
that  Commission  on  January  25,  1912,  advised  the 
Senate,  that  in  the  opinion  of  the  Commission  the 
Bill  should  not  be  passed  as  it  was  defective  and 

*  "Railroad   Regulation    in   Illinois,"   by   Blewett   Lee,    10  '111.   Law 
Review,  page  402. 


21 

erroneous  in  principle,  and  that  the  extra  cost  to 
the  companies  was  a  public  and  social  waste. 

Notwithstanding  this  report,  the  Legislature  of 
New  Jersey  subsequently  passed  an  Extra  Crew  Law. 
One  example  of  the  operation  of  this  law,  was  to 
require  one  of  the  railroad  companies  to  employ  an 
additional  brakeman  upon  a  through  passenger  train, 
which  made  only  one  stop  in  the  State  of  New  Jersey, 
and  which  train  already  carried  four  railroad  em- 
ployees, and  seventeen  mail,  dining  car,  and  Pullman 
employees,  or  twenty-one  in  all.  This  statute  and  a 
similar  one  in  Pennsylvania,  cost  the  railroads  in 
those  two  States,  $1,721,327.91  during  the  calendar 
year  1914,  an  absolute  economic  waste. 

Legislation  of  this  character  is,  as  Governor 
Hughes  pointed  out  in  his  veto  of  the  bill  in  the 
State  of  New  York,  "simply  arbitrary  exaction  and 
taking  of  property  without  due  process  of  law." 

Wasteful  and  injurious  as  is  the  extra  crew  law 
to  the  public  interest,  it  is  but  slight  as  compared  to 
the  maximum  train  law,  which  has  been  enacted  in 
one  State,  and  the  passage  of  which  is  being  con- 
tinuously urged  in  many  States. 

This  law  limits  the  number  of  cars  to  a  train, 
thereby  increasing  the  number  of  trains,  and  like 
the  extra  crew  law,  its  fundamental  object,  is  the 
employment  of  unnecessary  men,  with  the  conse- 
quent economic  waste. 

As  you  know,  railroad  companies  during  the 
last  fifteen  years  have  been  spending  large  sums  of 


22 


money  in  the  construction  of  larger  and  heavier  cars 
and  more  powerful  locomotives,  for  the  purpose  of 
increasing  the  average  loading  per  car,  as  well  as 
the  average  number  of  cars  per  train,  and  thus 
effecting  a  reduction  in  freight  train  mileage,  with 
the  consequent  saving  in  operating  expense. 

The  use  of  this  larger  and  heavier  equipment  has 
necessitated  (as  the  Commission  pointed  out  in  the 
Five  Per  cent.  Case,  31  I..C.  C,  351,  at  page  377) 
heavier  rails,  stronger  bridges,  better  ballast,  more 
ties,  reduction  in  grades  and  elimination  of  curves. 

Enormous  expenditures  have  been  made  for  the 
purpose  of  increasing  the  train  loading,  and  the 
efforts  of  the  Carriers  in  this  respect  have  been  de- 
clared by  the  Commission  to  be  "great  advances  in 
efficiency"  (31  I.  C.  C.,  at  page  411).  This  efficiency 
which  has  resulted  in  the  saving  of  expense,  will 
be  curtailed  by  a  law  limiting  the  number  of  freight 
cars  on  a  train,  thus  forcing  an  increase  in  the 
number  of  trains  and  number  of  employees. 

The  plea  of  those  who  urge  the  enactment  of 
maximum  train  and  extra  crew  laws  is  safety.  The 
real  reason  is  to  force  the  employment  of  additional 
and  unnecessary  men.  So  far  as  the  writer  knows, 
no  accident  has  ever  happened  which  would  have  been 
prevented  by  the  passage  of  either  of  these  laws. 

In  the  trial  of  the  Extra  Crew  Case  in  the 
State  of  Pennsylvania,  it  was  a  significant  fact  that 
the  labor  organizations,  with  their  hosts  of  witnesses 


23 

of  many  years  experience,  could  not  and  did  not  pro- 
duce one  single  instance  of  an  accident  to  pas- 
sengers or  employees,  due  to  the  failure  to  have  the 
train  crew  prescribed  by  the  Act.  The  same  point 
was  emphasized  by  the  Board  of  Public  Utility 
Commissioners  of  New  Jersey,  when  they  said:* 
"The  Board  believes  it  to  be  extremely  significant 
that  at  the  two  public  hearings  the  advocates  of  this 
measure,  or  one  similiar  to  it,  were  unable  to  cite, 
when  challenged,  any  serious  accident  resulting 
from  the  employment  of  insufficient  train  crews."f 

One  more  example  of  the  character  and  eco- 
nomic value  of  legislation  of  this  kind. 

It  has  been  the  practice  for  many  years  for 
many  railroad  companies  to  make  surprise  tests 
from  time  to  time,  as  to  whether  their  employees 
are  obeying  the  signals.  As  a  matter  of  fact,  those 
tests  show  that  those  signals  are  obeyed  in  more 
than  99  per  cent,  of  the  cases. 

In  order  to  prevent,  however,  the  disciplining 
of  the  men  who  fail  to  stand  the  test,  a  bill  has  been 
introduced  in  one,  if  not  more  than  one  State  Legis- 
lature, making  it  a  criminal  offense  to  make  a  test 
of  this  kind  without  giving  prior  notice  to  the 
employee. 

The  passage  of  a  law  of  this  kind  would  be 
a  direct  menace  to  the  safety  of  the  traveling 
public. 

*  Report  of  the  Public  Utility  Commission  to  the  Senate,  January 
23,   1912. 

t  The  people  of  Missouri  in  a  recent  referendum  declined  to  enact 
an  extra  crew  law. 
z  29 


24 

As  in  the  case  of  State  legislation  fixing  freight 
and  passenger  rates,  the  economic  waste  resulting 
from  extra  crew,  maximum  train  laws  and  other 
laws  of  this  character  is  and  will  be  borne  in  part, 
by  the  people  and  traffic  of  other  States.  No  sound 
argument  can  be  advanced  in  favor  of  any  State 
statute  regulating  the  details  of  operation. 

II.  STATE  PUBLIC  SERVICE 
COMMISSIONS 

Regulation  by  State  Commission  of  intra-state 
rates  and  practices  affecting  such  rates,  as  well 
as  of  operating  conditions,  has  so  far  proceeded 
that  nearly  every  State  has  a  Commission,  with 
complete  power  to  prescribe  intra-state  rates  and 
practices,  as  well  as  operating  conditions,  such  as 
the  number  and  schedules  of  trains,  character  of 
equipment,  construction  and  location  of  stations, 
etc. 

Regulation  by  State  Commission  is,  of  course, 
based  on  a  far  sounder  principle  than  regulation  by 
State  statute,  but  public  policy  now  demands  that 
the  State  Commissions  be  divested  of  jurisdiction 
over  intra-state  rates  and  that  such  jurisdiction  be 
vested  in  the  Federal  Government.  The  reasons 
for  this  statement  are  as  follows: 


25 

(a)      State  rates  directly  affect  interstate  rates. 

The  route  of  the  New  York  Central  between 
Buffalo  and  New  York  City  is  intra-state.  The 
routes  of  the  Pennsylvania  Railroad,  the  Erie  Rail- 
road, the  Lehigh  Valley  Railroad,  and  the  Dela- 
ware, Lackawanna  &  Western  Railroad  Compa- 
nies between  those  same  points  are  interstate.  If 
the  New  York  Public  Service  Commission  should 
reduce  the  rate  on  any  article  from  Buffalo  to  New 
York  via  the  lines  of  the  New  York  Central,  it  is 
obvious  that  such  reduction  will,  for  competitive 
reasons,  and  to  put  shippers  and  consignees  on  the 
lines  of  the  other  roads  on  a  competitive  equality 
with  the  New  York  Central,  force  a  correspond- 
ing reduction  of  the  rates  on  the  Pennsylvania  and 
the  other  interstate  routes. 

Following  the  first  "opinion  of  the  Interstate 
Commerce  Commission  in  the  Industrial  Railways 
Case,  29  I.  C.  C.  212,  the  Trunk  Lines  canceled 
their  allowances  to  the  South  Buffalo  Railroad 
Company,  owned  by  the  Lackawanna  Steel  Com- 
pany at  Buffalo,  thus  forcing  shippers,  located  on  the 
South  Buffalo  Railway,  to  pay  the  lo-cent  charge  of 
the  South  Buffalo  Railway  in  addition  to  the  freight 
rate  of  the  Trunk  Line.  The  New  York  Commission 
forced  the  New  York  Central  to  reinstate  their 
allowances  to  the  South  Buffalo  Railway,  on  the 
intra-state  route.  The  effect  of  this  action  was,  that 
until  the  Interstate  Commerce  Commission  permit- 


26 

ted  the  carriers  to  reinstate  the  allowances  on  the  in- 
terstate routes,  shipments  originating  on  the  South 
Buffalo  Railway  naturally  went  by  the  New  York  Cen- 
tral, as  the  rate  was  10  cents  less  than  the  rate  via 
the  other  routes.  Similar  action  on  the  part  of  the 
Pennsylvania  State  Commission,  in  connection 
with  the  allowances  paid  the  Union  Railroad  at 
Pittsburgh,  necessarily  accorded  an  advantage  to 
consignees  located  in  Philadelphia  on  the  Pennsyl- 
vania Railroad,  whose  route  is  intra-state  between 
Pittsburgh  and  Philadelphia,  as  compared  with 
consignees  located  on  the  Baltimore  &  Ohio  in  Phila- 
delphia, whose  route  from  Pittsburgh  is  interstate. 
As  Mr.  Justice  Hughes  said  in  the  Shreveport 
Case,  234  U.  S.,  at  page  351: 

"Wherever  the  interstate  and  intra-state 
transactions  of  carriers  are  so  related  that  ttie 
government  of  one  involves  the  control  of  the 
other,  it  is  Congress,  and  not  the  State,  that 
is  entitled  to  prescribe  the  final  and  dominate 
rule,  or  otherwise  Congress  would  be  denied 
the  exercise  of  its  constitutional  authority, 
and  the  State,  and  not  the  Nation,  would  be 
supreme  within  the  national  field." 

The  rates  established  by  the  State  of  Minne- 
sota which  were  under  consideration  in  the  Min- 
nesota Rate  Case,  230  U.  S.  352,  by  reason  of  com- 
petition, have  directly  forced  reductions  in  many  inter- 


27 

state  rates.  (Holmes  and  Hallowell  vs.  Ry.  Co., 
37  I.  CC  627.) 

So,  also,  intra-state  rates  directly  affect  inter- 
state rates,  owing  to  the  provisions  of  Section  4  of 
the  Interstate  Commerce  Act,  which  prohibits  the 
through  rate  from  exceeding  the  sum  of  the  local 
rates.  (See  Through  Rates  to  Points  in  Louisi- 
ana, 38  I.  C.  C.  153.) 

So,  also,  in  a  recent  case  (Western  Rate  Ad- 
vance Case,  35  I.  C.  C.  497)  the  carriers  were 
refused  permission  to  advance  certain  interstate 
rates,  apparently  (see  pages  589,  668,  669)  upon  the 
ground  of  the  much  lower  basis  in  effect  for  intra- 
state  rates. 

Other  examples  of  intra-state  rates  directly  af- 
fecting interstate  rates  will  be  found  in  R.  R.  Com. 
of  La.  vs.  Ry.  Co.,  23  I.  C.  C.  31 ;  McCormick  vs.  Ry. 
Co.,  37  I.  C.  ^234;  Texarkana  Freight  Bureau  vs. 
R.  R.  Co.,  38  I.  C.  C.  55;  The  Five  Per  cent.  Case, 
31  I.  C  C.  351,  387;  F.  S.  Royster  vs.  R.  R.  Co.,  38  I. 
C.  C.  190;  Houston  Ry.  Co.  vs.  U.  S.,  234  U.  S.  342. 

(b)  At  least  one  State  Commission,  has 
frankly  adopted  a  policy  of  protecting  their  own 
industries  against  the  competition  of  industries  of 
other  States,  by  the  adjustment  of  intra-state  rates, 
and  are  thus,  through  this  medium,  accomplishing 
the  commercial  discrimination  which  the  Consti- 
tution of  the  United  States  was  designed  to  pre- 
vent. 


28 

Examples  of  State  action,  of  this  character, 
will  be  found  in  R.  R.  Com.  vs.  Ry.  Co.,  23  I.  C.  C. 
31 ;  Houston  Ry.  Co.  vs.  U.  C.,  234  U.  S.  342,  and 
McCormick  vs.  Ry.  Co.,  37  I.  C.  C.  234,  and  it 
violates  one  of  the  fundamental  requirements  of 
our  system  of  government,  viz.,  that 

"Interstate  trade  was  not  left  (by  the 
Constitution)  to  be  destroyed  or  impeded  by 
the  rivalries  of  local  governments."* 

(c)  As  heretofore  pointed  out,  the  depletion 
of  the  revenues  of  the  carriers  resulting  from  un- 
justly low  rates  made  by  State  Commissions,  must 
be  made  up,  by  the  rates  on  interstate  traffic  and 
the  traffic  of  other  States. 

Notwithstanding  the  findings  of  the  Interstate 
Commerce  Commission,  in  the  Five  Per  cent.  Case,  as 
to  the  inadequacy  of  existing  passenger  rates  (supra, 
pages  14,  15),  the  action  of  one  of  the  State  Commis- 
sions, in  suspending  up  to  this  time,  the  increase  of  the 
intra-state  rates  in  that  State,  has  not  only  prevented 
the  increase  of  such  rates,  but  has  to  a  large  extent 
prevented  the  railroad  companies  from  receiving  the 
increase  on  interstate  rates  permitted  by  the  Interstate 
Commerce,  because  the  interstate  rates  may  be  de- 
feated by  purchasing  tickets  at  intra-state  stations. 

Under  existing  law,  the  Interstate  Commerce 
Commission  has  the  power  to  deal  with  a  discrim- 

*  Per  Mr.  Justice  Hughes  in  the   Shreveport  Case,  234  U.   S.,  at 
page  350. 


29 

ination  against  interstate  traffic  resulting  from 
intra-state  rates  (Houston  Railway  Co.  vs.  U.  S., 
234  U.  S.  342),  but  it  is  probable  that  the  State 
rates  are  valid  (so  far  as  this  question  is  con- 
cerned), no  matter  how  discriminatory  they  may 
be,  until  the  Interstate  Commerce  Commission  has 
specifically  passed  upon  the  question  of  discrimi- 
nation. Minnesota  Rate  Case,  230,  U.  S.  352).* 

If  we  are  to  have  that  uniformity  of  rate  regu- 
lation, and  that  prevention  of  discrimination 
against  localities,  and  the  commerce  of  other  states, 
which  is  so  essential  to  our  commercial  develop- 
ment, and  which  the  commerce  clause  of  the  Con- 
stitution was  designed  to  secure,  we  must  have 
State  control  divested  from  intra-state  rates. 

In  Canada,  a  railroad  operating  in  two  or  more 
provinces,  is  subject  to  the  Dominion  Parliament, 
and  the  Railroad  Commission  created  thereby,  and 
is  not  subject  to  the  Provincial  Legislatures.f 

It  will  hardly  be  contended  that  the  commerce 
of  Canada,  is  more  interdependent  than  the  com- 
merce of  the  United  States,  so  far  as  the  necessity 

of  uniformity  of  rate  regulation  is  concerned. 

•  • 
State  Control  Over  the  Issue  of  Railroad  Securities 

At  the  present  time  the  Interstate  Commerce 
Commission  has  no  jurisdiction  over  the  issue  or 


*  See  Federal  Control  of  Interstate  Railroad  Rates  by  Henry  W. 
Bikle  in  the  University  of  Pennsylvania  Law  Review  for  December 
1914. 

f  "Railroad  Regulation  in  Illinois  and  Elsewhere,"  by  Blevvett  Lee, 
10  111.  Law  Review,  page  402. 


30 

sale  of  securities.  Some  of  the  State  Commis- 
sions have  that  jurisdiction,  and  many  railroad 
companies  are  required  to  obtain  the  consent  of  the 
State  Commission  of  one,  or  of  sometimes  more 
than  one  State. 

The  unavoidable  delay  and  conflicting  regu- 
lations and  procedure,  incident  to  securing  the  con- 
sent of  more  than  one  Commission,  must  inevitably, 
in  many  instances,  seriously  affect  the  price  at 
which  the  necessary  capital  can  be  secured. 

Without  meaning  to  intimate  that  the  follow- 
ing, is  other  than  an  isolated  instance,  the  annual 
report  of  the  Southern  Pacific  Railway  Company 
contains  this  statement: 

"To  provide  funds  for  corporative  pur- 
poses, arrangements  were  made  with  bankers, 
in  May,  1913,  for  sale  of  two-year  notes  at  a 
very  satisfactory  price.  Authority  of  the 
California  Railroad  Commission  to  issue  the 
notes  was  obtained  without  delay;  approval  by 
the  Arizona  Corporation  Commission,  how- 
ever was  withheld,  pending  certain  assurances 
and  guaranties  on  the  part  of  the  Company 
with  reference  to  the  conduct  of  its  business  in 
Arizona  which  it  was  not  warranted  in  giving 
and,  during  the  time  the  matter  was  pending 
before  the  Commission,  the  condition  of  the 
money  market  had  so  changed  that  a  sale  of 
the  notes  could  not  be  made.  Further  consider- 
ation of  a  two-year  note  issue  was  abandoned, 
and  one-year  notes  were  issued  instead,  and 


sold  at  a  price  yielding  approximately  $275,000 
less  than  would  have  been  received  had  the 
two-year  notes  been  issued  without  delay. 
Under  the  laws  of  California  and  Arizona  the 
issue  of  one-year  notes  did  not  require  Com- 
mission approval." 

Mr.  Blewett  Lee  (in  his  interesting  paper  be- 
fore referred  to)  points  out  how  one  State  by  a 
provision  in  its  public  utilities  law,  has  been  en- 
abled to  exact  large  sums  of  money  from  railroad 
companies  incorporated  under  the  law  of  that 
State,  for  permission  to  issue  bonds,  much  of  the 
proceeds  of  which  are  to  be  used  for  improvements 
in  other  States.* 

All  power  with  respect  to  the  issue  or  sale  of 
railway  securities  should  be  taken  away  from  the 
States,f  and  be  vested  in  the  Interstate  Commerce 
Commission  to  the  extent  and  in  the  manner  here- 
inafter indicated. 

State  Control  of  Railroad  Operating  Conditions. 

It  can  hardly  be  doubted,  but  that,  in  the  in- 
terest of  economy  and  efficiency,  there  must  be  the 
same  uniformity  in  the  exercise  of  the  power  of 
regulating  operating  conditions,  as  in  establishing 
and  regulating  rates. 

*  If  there  had  been  similar  legislation  in  other  States  through 
which  one  of  our  large  railroad  systems  runs,  that  company,  would 
have  been  obliged  to  pay  to  the  states,  nearly  the  entire  capital  received 
under  a  recent  loan. 

f  See  recent  report  of  the  Massachusetts  Public  Service  Commis- 
sion on  the  New  York,  New  Haven  and  Hartford  Railroad  Company. 


32 

Economy  and  efficiency  does  not  permit,  in  the 
case  of  a  railroad  running  through  two  or  more  States, 
of  varying  regulations  in  those  States  as  to  the  char- 
acter of  safety  appliances  and  equipment,  hours  of 
labor,  character  of  headlight,  etc.  Furthermore,  oper- 
ating regulations  of  State  Commissions,  like  State 
laws,  may  substantially  increase  operating  expenses 
and  thus  ultimately  affect  interstate  revenues  and 
rates.  Certainly  such  subjects  as  signals,  number  of 
trainmen,  length  of  trains,  character  of  road-bed  and 
equipment,  should  be  as  completely  removed  from  the 
jurisdiction  of  the  States  as  have  the  questions  of 
safety  appliances,  and  the  hours  of  service  of  employ- 
ees, by  the  action  of  Congress.  (Ry.  Co.  vs.  U.  S.  222. 
U.  S.,  20;  Ry.  Co.  vs.  Washington,  222  U.  S.,  370; 
Erie  R.  R.  Co.  vs.  New  York,  233  U.  S.,  671.) 

Divesting  State  commissions  of  jurisdiction 
over  the  rates  and  operating  conditions  of  railroads, 
does  not  mean  the  abolition  of  State  Public  Utility 
Commissions.  There  remains  an  ample  field  for 
their  jurisdiction,  in  the  case  of  public  utilities,  not 
subject  to  the  Interstate  Commerce  Act. 

There  is  another  feature,  incident  to  State  Com- 
mission regulation  of  railroads, 'which  operates  against 
the  efficiency  of  such  regulation.  No  one  can  view 
without  concern,  the  increasing  tendency,  to  consider 
the  appointments  to  that  position  as  purely  political. 
It  can  hardly  be  anything  but  disheartening  to  a  con- 
scientious commissioner  to  feel  that  his  appointment 


33 

does  not  depend  upon  his  efficiency,  but  upon  the  politi- 
cal exigencies  of  the  moment.* 

The  position  requires  industry,  conscientious  abil- 
ity, and  faithful  service.  Many  members  of  the  State 
Commissions  possess  these  attributes,  but  their 
method  of  selection  or  election,  tends  more  and  more, 
to  disregard  each  and  all  of  these  features. 

III.  ACTION  OF  ARBITRATION  COMMIS- 
SIONS UNDER  THE  TERMS  OF  THE  ACT 
OF  CONGRESS  OF  JULY  15,  1913 

As  you  are  doubtless  aware,  wage  disputes  be- 
tween railroads  and  their  employees,  may  be  settled 
by  voluntary  arbitration  by  arbitrators  appointed 
under  the  terms  of  the  Act  of  Congress  of  July  15, 


When  you  remember  that  during  the  year  ending 
June  30,  1914,  the  number  of  employees  was  1,695,483, 
and  their  compensation  aggregated  $1,373,  422,472, 
it  can  readily  be  seen  that  the  decisions  of  the  arbitra- 
tors may  substantially  affect  the  revenues  of  the  Car- 
riers. How  important  those  various  increases  in 
wages  are  may  be  seen  from  the  fact  that  in  the  case 
of  30  of  the  35  Eastern  railway  systems,  if  the  scale  of 
wages  for  1909  had  been  in  effect  during  1913,  the 
labor  costs,  of  the  latter  year,  would  have  been  less  by 
fifty-one  millions  of  dollars,  than  they  actually  were.f 

*  In  twenty-two  States,  the  Commissions  are  elected.  See  "The 
Government  and  the  Railroads,"  by  Otto  H.  Kahn  in  the  World's 
Work,  February,  1916. 

fThe  Five  Per  cent.  Case,  31  I.  C.  C,  at  page  379- 


34 

In  1914,  the  last  year  for  which  the  figures  are 
available,  wages  were  approximately  62.4  per  cent,  of 
the  operating  expenses  (exclusive  of  taxes),  and  45 
per  cent,  of  the  operating  revenues. 

Notwithstanding  the  necessary  relation  between 
passenger  and  freight  rates  of  the  Carriers,  and  the 
wages  paid  their  employees,  the  Act  of  Congress  does 
not  provide  for  the  representation  by  the  Interstate 
Commerce  Commission  in  the  arbitration  proceedings 
under  the  Act,  and  we  have  had,  therefore,  in  the  past, 
decisions  by  arbitrators,  increasing  wages,  without  the 
slightest  responsibility  on  the  part  of  the  arbitrators, 
with  respect  to  the  rates  necessary  to  secure  the  funds 
to  provide  for  such  increases. 

Thus  in  the  1913  Arbitration  between  the  Eastern 
Railways  and  the  Order  of  Railway  Conductors  and 
Brotherhood  of  Railroad  Trainmen,  the  report  of  the 
Arbitrators,  in  granting  the  increase  said  (page  29)  : 

"The  Interstate  Commerce  Commission,  and 
not  this  Arbitration  Board,  has  the  duty  ot  de- 
termining whether  the  railroads  can  earn  in  addi- 
tion to  their  other  charges,  without  an  increase  in 
freight  rates,  the  rates  of  pay  that  this  Board 
believes  to  be  due  at  the  present  time  to  the  con- 
ductors and  trainmen,  which  rates  are  embodied 
in  the  Award  following." 

The  question  of  whether  the  rate  of  wage  should 
be  fixed,  irrespective  of  the  then  financial  ability  of  the 
carrier  to  pay  the  same,  is  not  the  question.  No 


35 

matter  how  the  wage  may  be  fixed  it  must  ultimately 
be  paid  out  of  operating  revenues,  i.  e.,  the  receipts 
from  the  transportation  of  passengers  and  freight, 
which  in  turn  depend  upon  the  size  of  the  passenger 
and  freight  rates. 

There  is,  therefore,  an  intimate  and  direct  connec- 
tion between  the  wage  and  the  transportation  rate, 
and  the  public  is  interested  in  both. 

It  is  hardly  probable  that  the  same  economies  can 
be  expected  in  the  future,  to  the  extent  that  they  have 
been  obtained  in  the  past,  by  increase  in  the  capacity 
of  the  transportation  units.  Many  of  the  improve- 
ments of  the  future,  such  as  elimination  of  grade  cross- 
ings, installation  of  automatic  signals,  enlargement 
and  beautification  of  stations,  etc.,  will  be  financially 
unremunerative. 

It  therefore  follows,  that  any  future  increases  in 
wages,  will  have  to  be  paid  for  (in  large  part)  out  of 
increases  in  freight  and  passenger  rates,  and  not  out  of 
operating  economies.  This  being  so,  the  body  which 
has  ultimate  control  of  the  rates,  should  participate  in 
the  deliberations  of  the  Board  of  Arbitrators,  and  thus 
remove  the  present  anomaly,  under  which,  the  agency 
which  grants  the  increase  in  wages,  has  not  the  slight- 
est responsibility  with  respect  to  the  fund  out  of  which 
the  wages  are  to  be  paid. 

The  public  interest  demands,  also,  another  change 
in  the  scope  of  the  arbitrations.  In  the  past,*  the 

*  This  is  not  owing  to  any  defect  in  the  Arbitration  Act,  but  to  the 
nature  of  the  controversies,  which  have  been  presented  for  arbitration. 


36 

arbitrations  have  been  entirely  one  sided,  that  is  to  say, 
the  employees  present  certain  demands,  and  the  ques- 
tion arbitrated  is,  whether  those  demands,  or  some 
modification  thereof,  shall  be  granted.  The  employees 
have  nothing  to  lose  under  this  method,  and  by  the 
simple  process  of  making  their  demands  high  enough 
in  the  first  instance,  they  may  obtain,  through  a  com- 
promise, all  they  originally  expected. 

There  are  various  rules  and  regulations,  which 
from  time  to  time  the  labor  organizations  of  employees 
in  the  train  service  have  forced  upon  the  carriers.  As 
to  many  of  these  there  are  grave  doubts  as  to  whether 
their  existence  is  compatible  with  the  public  welfare. 
For  example : 

(a)  If  an  employee's  schedule  of  pay  calls  for 
10  hours,  or  100  miles,  and  he  makes  his  run  in  4 
hours,  or  runs  only  90  miles,    he  is  not  obliged  to  do 
any  more  work  under  the  existing  regulation. 

(b)  In  various  instances  the  men  are  paid  twice 
for  performing  the  same  work.    They  are  guaranteed 
their  mileage  or  the  hours,  which  ever  is  the  greater, 
and  in  addition,  if  at  the  end  of  a  freight  run,  they  are 
required  to  switch  a  car  of  stock  to  a  stock  yard  or 
perishable  freight  to  a  team  track  or  warehouse,  addi- 
tional compensation  is  allowed,  notwithstanding  the 
time    consumed    in    doing    such    additional    work    is 
included  in  the  regular  hours.    They  secure  this  allow- 
ance whether  overtime  accrues  or  not. 


37 

(c)  The  present  rules  provide  for  a  guarantee  of 
daily  pay,  though  the  man  may  only  do  10  minutes 
work  on  a  "run"  for  which  he  is  called. 

Under  those  circumstances  the  Company  should 
have  the  right  to  call  the  employee  for  another  run. 

May  it  not  be  doubted  whether  rules  of  this  char- 
acter are  compatible  with  efficiency  and  economy,  and 
any  arbitration  of  a  demand  for  an  increase  in  wages 
should  involve  also  an  arbitration  of  the  demand  on 
the  part  of  the  Companies,  for  an  abrogation  of  these 
and  similar  rules. 

IV.  ACTS  OF  CONGRESS  FIXING  COMPEN- 
SATION FOR  CARRYING  THE  MAIL  (IN- 
CLUDING THE  PARCELS  POST) 

Under  existing  law,  the  Railroad  Companies  are 
paid  for  the  transportation  of  mail  (including  the  Par- 
cels Post),  under  a  schedule  of  rates  prescribed  by  the 
Act  of  Congress  of  March  3,  1873,  which  rates  were 
reduced  by  the  Act  of  July  12,  1876,  and  further  re- 
duced by  the  Acts  of  July  17,  1878,  and  March  2,  1907. 

Rates  established  by  this  method  are  open  to  the 
same  objections  as  rates  fixed  by  State  laws,  and  the 
rates  named  in  the  statutes  bear  no  direct  or  adequate 
relation  to  the  cost  or  value  of  the  service. 

The  Carriers  believe  that  the  rates  in  question  are 
unjustly  low  and  in  support  of  their  belief  show : 

(a)  That  the  rates  are  based,  90%  on  the  weight 
of  the  mail  transported  and  10%  on  Railway  Post 


38 

Office  Cars  for  sorting  mails  in  transit.  The  weight 
is  obtained  by  weighings  of  the  mail  (carried  by  each 
Carrier)  for  ninety  days  once  every  four  years.  As 
the  mail  increases  from  time  to  time,  the  Railroads  are 
underpaid  (even  under  the  rates  fixed  by  the  Act),  for 
all  mail  transported  during  the  period  subsequent  to 
the  date  of  weighing  and  until  the  next  weighing  takes 
place. 

(b)  A    joint    Committee,    (of    which    Senator 
Bourne  was  Chairman)  of  the  Senate  and  House  of 
the  Sixty-third  Congress,  appointed  to  investigate  the 
questions  relating  to  the  Railway  Mail  Pay,  reported 
under  date  of  August  31,  1914,  that  the  Railroads  were 
underpaid  at  least  Three  Millions  of  Dollars  per  year. 

(c)  Mr.   Robert  H.  Turner,   Secretary  of  the 
Committee,  reported  that  the  Railroads  were  under- 
paid approximately  Twelve  Millions  of  Dollars  per 
year  (Railway  Mail  Pay  Hearings,  page  962),  and 
Mr.  M.  O.  Lorenz,  Associate  Statistician  of  the  Inter- 
state Commerce  Commission  said  that  he  thought  there 
was  an  underpayment  of  at  least   10  per  cent,    (or 
$5,000,000),  although  he  recommended  a  further  test 
of  his  conclusions.      (Railway  Mail  Pay  Hearings, 
page  894.) 

(d)  The  Committee  on  Postal  Affairs  of  the 
Merchants  Association  of  New  York,  under  date  of 
October  21,  1915,  (page  17  of  the  report),  advised  the 
Association,   that  the  Railroads  nowr  underpaid  for 
mail  carriage,  to  the  extent  of  approximately  Eleven 
or  Twelve  Millions  of  Dollars  per  year. 


39 

(e)  The   Congressional   Committee  before   re- 
ferred to,  reported  (Appendix,  pages  33-39)  that  dur- 
ing the  years  1909-1910,  the  mail  traffic  earnings  were, 
per  car  mile,  22  per  cent,  less  than  the  passenger  traffic 
earnings,  and  slightly  over  20  per  cent,  less  than  the 
average    earnings    of    the    entire    passenger    service, 
which,  as  you  will  remember,  the  Interstate  Commerce 
Commission  in  the  Five  Per  cent.  Case  (31  I.  C.  C, 
387-392)  found  were  less  than  they  should  be. 

(f)  Mr.  Louis  D.  Brandeis,  Special  Counsel  for 
the  Interstate  Commerce  Commission  in  the  Five  Per 
cent.  Case,  said,  in  his  brief  in  that  case  (page  133), 
after  discussing  the  evidence  submitted  to  the  Bourne 
Committee:     "It  seems  clear  that  the  Railway  Mail 
service  is  at  present  unremunerative  to  the  Carriers." 

(g)  A  joint  Congressional  Committee  reported 
in  January,  1901,  that  the  Railroads  were  not  then 
overpaid.    During  the  period  1900-1915,  total  receipts 
of  the  Post  Office  Department  increased  181  per  cent., 
total    expenses    increased    177    per    cent.,    while    the 
amount  paid  the  Railroads  for  carrying  the  mail  only 
increased  60  per  cent.     During  that  same  period  all 
expenses,   except  Railway   Mail  Pay,   increased  239 
per  cent. 

The  scientific  and  equitable  method  of  determining 
the  question  of  proper  compensation,  is  that  urged  Dy 
the  Carriers  upon  Congress,  viz.,  that  the  Interstate 
Commerce  Commission  should  be  given  jurisdiction  to 
pass  upon  the  question. 


4o 


V.  REGULATION  BY  THE  INTERSTATE 
COMMERCE  COMMISSION  UNDER 
THE  PROVISIONS  OF  THE  INTER- 
STATE COMMERCE  ACT 

If  what  has  been  said  heretofore,  with  respect  to 
railroad  regulation,  through  State  agencies  and  di- 
rectly by  Act  of  Congress,  be  correct,  it  follows  that  the 
necessary  Governmental  regulatory  power  should  be 
exercised  through  a  Federal  Commission  with  sufficient 
numbers  and  proper  personnel,  and  with  such  powers 
as  may  be  necessary  to  accomplish  efficient  regulation. 
To  accomplish  these  propositions,  it  is  suggested: 

(a)  That  the  membership  of  the  Commission 
should  be  materially  increased,  and  the  additional 
members  of  the  Commission  should  be  selected  from 
men  having  broad  experience  in  railroad  management, 
operation,  traffic  and  finance. 

During  the  year  1915,*  964  formal  complaints 
were  filed  with  the  Commission,  902  decisions  render- 
ed, and  205  cases  dismissed  by  stipulation.  200,000 
pages  of  testimony  were  taken,  and  198  cases  were 
orally  argued  before  the  Commission,  103  days  being 
devoted  to  this  latter  purpose.  As  it  was  obviously 
impossible  for  the  Commission  (now  composed  of 
seven  members)  to  devote  103  days  to  argument,  and 
at  the  same  time  take  200,000  pages  of  testimony,  the 
latter  was  taken  chiefly  before  45  examiners. 

*  See  Annual  Report  of  the  Commission  for  1915. 


41 

The  Commission,  also,  during  this  period,  con- 
ducted four  investigations,  pursuant  to  resolutions  of 
Congress,  as  well  as  a  large  number  of  investigations 
instituted  upon  their  own  motion. 

The  Commission  also  disposed  of  210  applica- 
tions to  suspend  tariffs,  entered  822  orders  for 
relief  from  the  operation  of  the  Fourth  Section 
of  the  Act,  exercised  the  necessary  supervision  over 
the  accounts  of  the  Carriers,  enforced  the  Safety 
Appliance  and  Hours  of  Service  Law,  and  exercised 
their  powers  over  Express,  Telegraph  and  Telephone 
Companies.  In  addition  to  this  work  the  Commission 
are  responsible  for  the  valuation  of  250,000  miles  of 
railroad  and  the  property  of  telegraph,  telephone,  ex- 
press companies,  pipe  line  companies,  and  other  com- 
mon carriers  subject  to  the  Act. 

This  inordinate  press  of  business  has  prevented 
some  matters,  from  receiving  the  personal  attention  of 
the  Commission,  which  the  importance  of  the  subject 
requires,  and  has  necessitated  their  delegation  to  sub- 
ordinates. This  is  a  distinct  element  of  weakness  in 
the  present  system,  and  is  likely  to  increase  if  not 
promptly  remedied. 

There  is  also  in  some  instances,  a  distinct  waste 
of  time  involved  in  the  present  method  of  taking  tes- 
timony before  the  Examiners,  and  too  much  time  has 
to  be  devoted  by  officers  of  carriers  in  attenuance  at 
these  hearings. 


4- 

As  Commissioner  Harlan  has  said  in  the  Western 
Advance  Rate  Case,  (35  I.  C.  C,  497,  681)  : 

"Too  much  time  and  labor  are  expended  in 
the  recurring  rate  contests,  and  some  way  should 
be  found  under  legislative  authority  for  arriving 
at  results  more  promptly  than  is  now  possible 
under  our  present  powers  and  practices." 

The  tenure  of  office  (seven  years)  of  the  Commis- 
sion should  be  materially  increased,  and  their  present 
compensation  ($10,000  per  annum)  should  be  in- 
creased to  a  figure,  commensurate  with  the  labor  and 
responsibility  which  the  work  entails. 

The  members  of  the  Canadian  Commission  receive 
annual  salaries  of  $15,000,  and  their  appointments  are 
for  life.  There  cannot  be  the  slightest  doubt  but  that 
the  labor  and  responsibility  incident  to  a  position  on  the 
Federal  Commission  is  much  greater  than  on  the  Can- 
adian Commission,  yet  the  members  of  our  Commis- 
sion receiye  less  compensation,  and  are  subject,  every 
seven  years,  to  the  menace  of  non-reappointment. 

(b)  For  the  reasons  heretofore  given,  the  juris- 
diction of  the  Interstate  Commerce  Commission  should 
be  specifically  extended  over  all  intra-state  rates  and 
practices  affecting  such  rates. 

(c)  The  Commission  should  be  given  specific 
jurisdiction*  to  prescribe  minimum  as  well  as  maxi- 
mum rates,  as  it  is  as  much  against  public  policy  to 

*  For  an  example  of  the  exercise  by  the  Canadian  Commission  of 
its  power  to  prevent  reduction  in  rates,  see  in  re  Canadian  Northern 
Ry.  Company's  Special  Freight  Tariff,  Order  No.  24727. 


43 

have  unreasonably  low  rates*  as  it  is  to  have  unrea- 
sonably high  rates. 

(d)  The  Commission  should  be  vested  with  the 
power,  not  to  permit  or  prohibit  the  issuance  of  securi- 
ties, but  to  require  full  publicity  of  such  issues,  and 
equal  publicity  as  to  the  application  of  the  proceeds 
thereof.f 

The  advantage  of  this  plan,  over  that  advocated  of 
giving  the  Commission  complete  jurisdiction  over  the 
issuance  of  securities,  is,  that  it  will  not  substitute  the 
discretion  of  the  Government  for  that  of  the  manage- 
ment of  the  railroad,  as  to  the  purpose  for  which  the 
issue  should  be  made,  and  will  also  remove  the  injur- 
ious delay,  which  in  many  instances,  will  necessarily 
result,  if  Governmental  permission  has  to  be  had  be- 
fore the  securities  are  issued. 

That  delay  which  would  be  inevitable,  if  the  Com- 
mission were  required  to  sanction  the  issue,  would  add 
to  the  cost  of  securing  new  capital,  and,  therefore, 
would  be  contrary  to  the  public  interest. 

The  publicity  of  the  purposes  of  the  issue,  and  of 
the  application  of  the  proceeds,  will  prevent  the  recur- 
rence of  such  financial  transactions,  as  have  in  the 
past,  been  deserving  of  severe  criticism. 


*  See  opinion  of  Commissioner  Harlan  in  Western  Advance  Rate 
Case,  35  I.  C.  C,  at  page  681. 

t  This  conforms  to  the  views  expressed  by  the  Railroad  Securities 
Commission,  of  .which  President  Hadley  of  Yale  University  was  chair- 
man, in  their  report  to  President  Taft,  under  date  of  November  I,  1911. 


44 

(e)  If  jurisdiction  over  operating  conditions  is 
to  be  taken  away  from  the  States,  it  would  probably 
be  desirable  to  vest  jurisdiction  in  the  Federal  Commis- 
sion over  certain  operating  matters,  such  as  the  num- 
ber of  the  train  crew,  adequacy  of  signal  protection, 
etc.    It  would  not  be  possible,  in  this  paper,  to  discuss 
the  proper  scope  of  this  jurisdiction  and  its  essential 
limitations. 

Public  policy  demands  that  full  jurisdiction  be 
given  to  the  Federal  Commission  over  rates  and  prac- 
tices affecting  rates,  but  public  policy  also  demands, 
that  the  freest  latitude  be  accorded  the  operating  de- 
partments of  the  Railroads,  that  is,  to  the  men  devot- 
ing their  lives  to  the  extremely  technical  questions  of 
railroad  operation. 

Governmental  control  over  operating  conditions 
(by  reason  of  their  complexity,  the  necessity  for  knowl- 
edge of  local  conditions,  and  the  importance  of  practi- 
cal experience),  is  more  likely  to  tend  to  inefficiency 
than  to  efficiency,  though  national  control,  through  a 
Commission,  is  infinitely  better  than  control  through 
federal  or  state  statute,  or  state  commission. 

(f )  Jurisdiction  should  be  vested  in  the  Federal 
Commission  to  determine  the  reasonable  rate  to  be  paid 
by  the  Government  for  the  transportation  of  the  mail 
and  parcels  post,  just  as  the  Commission  has  today  the 
power  to  determine  the  reasonable  rate  to  be  charged 
for  the  transportation  of  Governmental  supplies  and 
employees. 


45 

(g)     Pooling  Arrangements. 

Carriers  could  be  specifically  permitted,  subject 
to  the  approval  of  the  Commission,  to  make  traffic 
agreements  which  will  secure  the  maintenance  of  rea- 
sonable rates,  the  elimination  of  discrimination,  and 
the  elimination  of  duplication  of  service,  particularly 
in  connection  with  the  passenger  service.  It  is  highly 
probable,  that  economies  in  both  freight  and  passenger 
transportation  could  be  effected,  by  the  elimination  of 
the  duplication  of  existing  passenger  service  by  differ- 
ent railroads  between  two  cities,  and  by  the  pooling 
of  freight  traffic  or  earnings  therefrom. 

The  prohibition  in  the  Interstate  Commerce 
Act  against  the  pooling  of  traffic,  is  a  relic  of  the 
idea,  that  the  public  interests  were  best  served  by 
competition.  The  underlying  basis  for  that  idea 
was  that  competition  prevented  unreasonably  high 
rates  and  improved  service.  A  regulatory  body, 
such  as  a  Commission,  can  secure  these  results 
without  the  necessity  of  competition.  Unrestricted 
competition  generally  means  waste,  as  is  recognized 
by  the  decisions  of  many  State  Commissions,  pre- 
venting the  duplication  of  existing  public  utilities, 
and  by  the  statutes  of  many  States  which  require 
a  certificate  of  public  necessity  before  a  proposed 
utility  can  even  be  incorporated. 

(h)     Power  to  suspend  tariffs. 
It  seems  to  be  a  more  or  less  general  view  that 
the  Interstate  Commerce  Commission  suspends  all 


46 

tariffs  making  increases  in  rates.  Such  is  not  the 
fact,  as  will  appear  from  an  examination  of  the 
records  of  the  Commission.  At  present  the  Com- 
mission has  power  to  suspend  tariffs  for  a  maxi- 
mum period  of  ten  months,  the  result  of  which  is 
that  if  a  rate  so  suspended  should  subsequently  be 
found  to  be  reasonable,  the  carriers  lose  the  reve- 
nue during  the  period  in  question,  while  if  the  rate 
had  gone  into  effect  and  had  subsequently  been 
held  to  be  unreasonable,  the  shipper  would  be  enti- 
tled to  reparation. 

It  is  probable  that  there  should  be  some  modi- 
fication with  respect  to  the  exercise  of  the  power. 
Possibly  it  might  with  advantage  be  confined  to 
cases  involving  questions  of  discrimination  be- 
tween localities,  and  be  not  exercised  in  cases 
which  involve  only  the  question  of  an  advance  in 
rates,  unless  there  should  be  a  more  or  less  general 
advance,  such  as  wras  involved  in  the  Five  Per  cent. 
Case. 

(i)  The  accounting  requirements  formulated 
by  the  Commission,  the  uniform  demurrage  rules,* 
the  regulations  for  the  transportation  of  explosives, 
and  the  bill  of  lading  recommended  by  the  Inter- 

*The  present  condition  of  congestion  on  the  eastern  railroads, 
would  seem  to  indicate  the  necessity  of  securing  the  co-operation  of 
the  Commission,  towards  increasing  the  demurrage  charge,  in  cases 
where  consignees  are  using  freight  cars  for  warehouses.  See  speech 
of  George  D.  Dixon  to  the  National  Wholesale  Lumber  Dealers  Asso- 
ciation, March  16,  1916. 


47 

state  Commerce  Commission  are  a  few  examples* 
of  the  constructive  work  done  by  that  body,  and 
the  people  of  the  United  States  want  more  of  work 
of  that  kind  on  the  part  of  the  Commission.  Why 
should  not  our  railroad  legislation  be  as  constructive 
as  our  banking  and  currency  legislation?  Why 
should  not  the  Commission  be  given  express  au- 
thority to  make  recommendations  to  Congress  and 
to  the  States,  with  respect  to  railroad  legislation, 
present  and  prospective? 

A  Commission  so  empowered,  might  well  call 
to  the  attention  of  the  country,  the  growing  burden 
of  railroad  taxation,  state  and  national,  and  the 
economic  injury  inflicted  thereby  upon  the  country 
at  large.  The  country  needs,  what  Mr.  Charles 
Francis  Adams,  the  first  Chairman  of  the  Massa- 
chusetts Commission,  designated  as  "the  eventual 
supremacy  of  an  enlightened  public  opinion,"  and 
the  country  looks  to  the  Federal  Commission,  to 
secure  such  enlightenment  on  all  railroad  questions. 

The  effect  of  the  present  method  of  regulation  on 
the  revenues  of  the  carriers. 

The  question  may  be  asked:  Has  this  conflict- 
ing, inefficient  regulation  injured  the  carriers,  and 
consequently  the  general  public?  Yes,  without  the 
shadow  of  a  doubt. 


*  See  address  by  A.  J.  County  before  the  Wharton  School  of  the 
University  of  Pennsylvania. 


48 

Let  me  call  your  attention  to  the  figures 
shown  by  the  property  investment  and  income  ac- 
counts for  the  period  1900-1915,*  of  the  Pennsyl- 
vania, New  York  Central,  and  Baltimore  £  Ohio 
Systems,  the  roads  which  the  Commission  regarded 
as  typical  of  railroad  conditions  east  of  Chicago 
and  north  of  the  Potomac  River. 

In  the  case  of  the  Pennsylvania  System,  the 
net  operating  income  for  1915  was  the  lowest 
(with  one  exception,  the  year  1904)  of  any  year 
since  1901,  and  in  the  fourteen  years  since  1901, 
the  property  investment  had  increased  650  mil- 
lions of  dollars;  that  is,  roughly  speaking,  this  amount 
of  investment  has  earned  nothing. 

The  year  1915  was  not  extraordinary;  1914 
was  almost  as  bad,  it  furnishing  the  lowest  (with 
two  exceptions)  net  operating  income  since  1901. 
In  1913,  the  year  of  largest  returns,  where  the  total 
operating  revenue  was  38  millions  of  dollars  higher 
than  in  any  previous  year,  the  return  on  the  prop- 
erty investment  was  lower  than  in  any  previous  year. 

As  Mr.  Rea  pointed  out  in  his  testimony  in  the 
Five  Per  cent.  Case,  the  Pennsylvania  System,  in  a 
year  which  was  the  largest  in  its  history,  so  far  as 
traffic  was  concerned,  with  a  larger  amount  of  cap- 
ital obligations  oustanding  than  ever  before,  with 
a  plant  larger,  more  complete,  and  more  efficient 
than  at  any  time,  finds  itself  no  better  off,  so  far  as 

*  Fiscal  years  ending  June  30th. 


49 

its  owners  are  concerned,  than  it  was  fifteen  years 
ago,  when  the  country  was  just  emerging  from  a 
period  of  financial,  commercial  and  industrial  de- 
pression, at  least  as  severe,  as  any  recorded. 

If  we  were  to  examine  the  figures  of  the  New 
York  Central  and  the  Baltimore  &  Ohio,  we  would 
find  the  same  general  facts  therein  and  tendencies 
disclosed  thereby,  as  in  the  case  of  the  Pennsyl- 
vania System,  and  it  was  these  facts  which  led  Mr. 
Willard,  the  President  of  the  Baltimore  &  Ohio,  to 
say  to  the  Commission  on  November  23,  1913,  in 
his  opening  speech  in  the  Five  Per  cent.  Case: 

"I  have  shown  that  tendencies,  which  have 
been  operating  over  a  period  of  at  least  ten 
years,  have  resulted  in  such  diminishing  net  re- 
turns that  it  has  gradually  come  about  that 
money  invested  in  these  railroads,  because  of 
the  low  average  rates  prevailing  in  so-called 
Official  Classification  Territory,  and  for  other 
reasons,  does  not  earn  the  same  return  as 
money  invested  in  other  enterprises  of  similar 
kind  or  character.  As  a  matter  of  fact  money  so 
invested  during  the  last  three  years,  taken  as  a 
whole,  has  earned  no  return  whatever.  In  view  of 
all  this,  those  responsible  for  the  management  of 
these  properties  would  not  be  justified  in  continu- 
ing large  expenditures  of  new  capital  for  ad- 
ditional facilities  and  equipment,  even  if  such  cap- 
ital were  available  at  reasonable  rates  of  interest.' 


50 

These  views  were  expressly  confirmed  by  the 
Commission  by  their  finding  in  the  Five  Per  cent. 
Case,  (31  I.  C.  C,  at  page  384)  : 

"That  the  net  operating  income  of  the 
railroads  in  Official  Classification  Territory,* 
taken  as  a  whole,  is  smaller  than  is  demanded 
in  the  interest  of  both  the  general  public  and 
the  railroads."f 

As  a  necessary  result  of  the  financial  condition  which 
has  just  been  described,  we  find  that  comparing  the 
five  calendar  years  ending  1914  with  the  five  calen- 
dar years  ending  1910,  the  latter  period  shows  a  de- 
crease, as  compared  with  the  former,  of  42  per  cent, 
in  new  mileage  built,  32  per  cent,  in  freight  cars 
ordered,  29  per  cent,  in  locomotives  ordered,  with  an 
increase  of  4%%  in  passenger  cars  ordered.^ 

Railroad  improvement  has  come  to  a  stand- 
still, for,  as  Mr.  Rea  said  in  his  speech  before  the 
New  York  Chamber  of  Commerce: 

"Apparently  the  interests  of  everyone 
have  been  safe-guarded  under  public  regula- 
tion except  the  interests  of  those  who  furnish 
the  money  for  the  public  service;  and  we  must 
protect  these  investors  upon  whom  we  must 
rely  for  future  capital.  Failure  in  the  last 


*  This  condition  is  not  peculiar  to  the  eastern  roads.  See  Western 
Advance  Rate  Case,  35  I.  C.  C.  497. 

f  There  will  be  a  substantial  improvement  in  the  figures  for  the 
year  ending  June  30,  1916. 

$  Article  by  Mr.  S.  O.  Dunn  in  the  North  American  Review  for 
November,  1915. 


decade  to  protect  the  railroads  and  railroad 
investors  has  at  last  produced  a  lack  of  confi- 
dence in  public  regulation,  and  we  now  know 
that  through  the  weakness  of  the  railroads, 
the  whole  country  is  suffering." 

Does  anyone  suppose  that  the  public  interests 
permit  railroad  development  to  stop?  With  250,- 
ooo  miles  of  main  track,  are  we  content  with  only 
27,604  miles  of  second  track?  Are  we  to  stop  build- 
ing and  enlarging  classification  yards,  installing 
automatic  signals,  removing  grade  crossings,  con- 
structing steel  cars?*  Yet  that  is  what  will  happen 
under  our  present  system  of  regulation,  if  we  are  to 
look  to  private  capital  for  the  development  of  our  rail- 
way facilities ;  and  a  very  slight  experience  of  govern- 
mental operation  of  railroads  in  the  United  States,  will 
confirm  Mr.  Acworth's  statement,  that  no  country  has 
ever  accepted  government  ownership  because  it  was 
more  desirable  as  an  abstract  proposition,  but  have 
only  done  so  for  military  reasons,  inability  to 
secure  private  capital,f  etc. 

FEDERAL  VALUATION  OF  RAILROADS 

No  discussion  of  the  subject  of  governmental  reg- 
ulation of  railroads  would  be  complete,  without  a 

*  As  to  the  importance  of  our  railway  system  in  connection  with 
the  question  of  national  preparedness,  see  speech  by  George  D.  Dixon 
before  the  International  Trade  Congress  on  December  6,  1915. 

t  See  "The  Relation  of  Railroads  to  the  State,"  by  W.  M.  Acworth, 
1914. 


52 

reference*  to  the  valuation  of  all  the  property  owned 
or  used  by  common  carriers  subject  to  the  provision 
of  the  Interstate  Commerce  Act,  which  is  now  being 
undertaken  by  the  Interstate  Commerce  Commission 
pursuant  to  the  provisions  of  the  Act  of  Congress  of 
March  i,  1913.  The  Act  provides  in  substance  that 
the  Commission  shall  ascertain  and  report: 

The  value  of  all  the  property  owned  or  used  by 
every  common  carrier  subject  to  the  provisions  of  this 
Act. 

The  original  cost  to  date,  cost  of  reproduction 
new,  and  cost  of  reproduction  less  depreciation,  of 
each  piece  of  property  owned  or  used  by  said  common 
carrier,  for  its  purposes  as  a  common  carrier. 

The  original  cost,  and  present  value,  of  all  lands, 
rights  of  way,  and  terminals  owned  or  used  for  the 
purpose  of  a  common  carrier. 

The  original  cost,  and  present  value,  of  property 
held  for  purposes,  other  than  those  of  a  common  car- 
rier. 

Financial  history  of  the  Carrier — increases  or  de- 
creases of  stocks,  etc., — syndicate  and  other  financial 
arrangements — net  and  gross  earnings — expenditure 
of  all  moneys  and  the  purposes  for  which  the.  same 
were  expended. 

*  For  a  thorough  discussion  of  the  valuation  work,  see  articles  by 
C.  A.  Prouty  and  Thomas  W.  'Hulme  (General  Secretary  of  the  Presi- 
dent's Conference  Committee)  in  the  Annals  of  the  American  Academy 
of  Political  and  Social  Science  for  January,  1916,  as  well  as  an  address 
delivered  before  the  Traffic  Club  of  Chicago  on  February  29,  1916,  by 
Pierce  Butler,  of  Counsel  for  the  President's  Conference  Committee. 


53 

Amount  and  value  of  any  aid,  gift,  grant,  right  of 
way,  or  donation  made  to  any  common  carrier  by  any 
government  or  by  individuals ;  value  of  land  grants  and 
concessions  made  by  the  carrier  in  exchange  therefor. 

It  has  been  frequently  stated  that  the  valuation  is 
only  to  be  used  for  the  purpose  of  fixing  rates.  If  this 
were  so,  the  question  might  well  arise  as  to  the  wisdom 
of  expending  the  enormous  sum  of  money  (fifty  mil- 
lions* or  more)  which  the  work  will  cost,  in  view  of 
the  few  rate  cases  in  which  the  valuation  figures  will 
be  of  importance. 

If  you  will  examine  the  thousands  of  decisions 
which  the  Federal  Commission  has  handed  down,  you 
will  find,  in  how  few  instances,  the  question  of  the  val- 
uation of  the  property  of  the  carriers,  is  of  any  impor- 
tance in  that  connection.  The  railroad  rate  structure 
of  the  country  has  been  a  matter  of  continual  growth 
and  development,  primarily  based  upon  the  commercial 
necessities  of  each  service,  and  rates,  accordingly,  are 
generally  based,  upon  the  value  of  the  service,  and  not 
upon  the  cost  of  the  service,  or  the  value  of  the  propeny 
employed  therein.  Of  course,  there  are  instances,  in- 
volving a  general  advance  in  rates,  as  in  the  recent 
Five  Per  cent.  Case  and  Western  Rate  Advance  Case, 
and  also  cases  where  the  carriers  claim  that  their 
property  is  confiscated  under  rates  fixed  by  Federal  or 
State  authority,  in  which  the  value  of  such  property 
becomes  of  great  importance. 

*  See  article  by  Mr.  Hulme,  before  referred  to. 


54 

The  Valuation  Act  is  itself  silent  as  to  the  pur- 
poses for  which  the  valuation  is  to  be  used,  though  it 
states,  that  all  final  valuations  fixed  by  the  Commission 
shall  be  "prima  facie  evidence  of  the  value  of  the  prop- 
erty" in  all  proceedings  under  the  Interstate  Commerce 
Act,  in  judicial  proceedings  to  enforce  that  Act,  and  in 
judicial  proceedings  to  enjoin  orders  of  the  Commis- 
sion. 

That  the  purpose  of  the  Valuation  Act  is  nor 
merely  an  incident  of  rate  regulation,  will  be  seen  from 
the  recommendations  of  the  Commission  on  the  subject 
(which  doubtless  were  the  potent  reason  for  the  enact- 
ment), as  made  from  time  to  time,  for  twenty-five 
years  prior  to  the  passage  of  the  Act.  The  Commis- 
sion recommended  that  a  valuation  should  be  made  for 
these  purposes : 

1 i )  To  obtain  a  trustworthy  estimate  of  the 
relation  existing  between  the  present  worth  of  rail- 
road property  and  its  cost  to  its  proprietors. 

(2)  In  determining  whether  rates  as  fixed  by 
the  Government  are  confiscatory. 

(3)  In  connection  with  railway  taxation. 

(4)  In  the  ascertainment  of  a  proper  deprecia- 
tion reserve. 

( 5 )  In  testing  the  accuracy  of  the  balance  sheets 
of  the  carriers ;  and  in  the  organization  of  railway  sta- 
tistics in  general. 


55 

(6)  In  determining  whether  the  railroads  are 
under  or  over-capitalized. 

The  people  of  the  United  States  are  fortunate  in 
having  been  able  to  secure  the  services  of  Mr.  C.  A. 
Prouty  as  Director  of  the  Valuation  Division  organ- 
ized by  the  Commission,  his  many  years  of  experience 
as  a  member  of  that  Commission  making  him  peculiarly 
fitted  to  be  in  charge  of  this  responsible  work. 

The  Government  is  at  present  surveying  about 
4000  miles  of  road  a  month  and  expect  to  complete  the 
work  by  approximately  January  i,  1920. 

The  Rail  Carriers  have  appointed  Committees  of 
engineering,  land,  equipment,  accounting  officers,  as 
well  as  counsel,  for  the  purpose  of  accomplishing  the 
duty  of  co-operating  with  the  Government,  which  the 
Act  specifically  requires. 

Some  idea  may  be  obtained  of  the  magnitude  of 
the  valuation  work,  when  you  consider  that  the  Com- 
mission is  required  to  ascertain  not  only  the  present 
value  of  376,000  miles  of  tracks  and  sidings,  but  the 
value  also  of  thousands  of  acres  of  land  used  for  ter- 
minals, as  well  as  the  value  of  the  securities  and  all 
other  kinds  of  property  owned  by  the  carriers.  The 
Commission  is  also  required  to  ascertain  the  original 
cost  to  date,  cost  of  reproduction  new,  and  cost  of 
reproduction  less  depreciation,  of  each  piece  of  prop- 
erty, owned  or  used  by  the  carriers,  for  their  purposes 
as  common  carriers. 


56 

To  find  the  cost  of  reproduction  new,  requires 
the  ascertainment  of  grading  quantities,  their  yardage 
and  classification,  a  determination  of  questions  of 
shrinkage  and  subsidence,  the 'form  and  manner  in 
which  the  road  shall  be  reproduced,  and  the  time  re-< 
quired  to  reproduce  the  same.  It  requires  also  the 
ascertainment  of  engineering  charges,  contingencies, 
interest  during  construction,  taxes,  amounts  to  be 
allotted  to  promotion  organization  and  administration, 
materials  on  hand,  and  working  capital,  as  well  as  the 
determination  of  the  unit  prices  to  be  applied  to  the 
quantities  so  ascertained. 

In  determining  reproduction  less  depreciation, 
the  Commission  will  be  required  to  ascertain  not 
only  the  extent  and  amount  of  depreciation,  but 
also  the  extent  and  amount  of  appreciation,  and 
finally  there  will  come  the  ascertainment  of  the 
intangible  values,  which  the  Act  designates  as  "other 
values  and  elements  of  value,"  such  as  location,  going 
concern,  etc. 

Amongst  the  details,  which  the  Act  requires  the 
Commission  to  ascertain,  is  the  original  cost  to 
date  of  "each  piece  of  property  owned  or  used  by 
said  common  carrier  for  its  purposes  as  a  common 
carrier."  Though  it  may  be  possible  to  obtain  the 
purchase  price  of  a  piece  of  property,  it  wrill  be 
impossible,  in  many  instances,  to  allocate  to  such 
piece  of  property  the  appropriate  overhead  charges 
and  the  cost  of  putting  the  property  in  place,  all 


57  ''.:J.' 

of  which  are  necessary  elements  in  determining  the 
cost  to  date  of  that  piece  of  property.  The  records 
of  the  carriers  have  never  been  required  to  be  kept 
so  as  to  show  the  cost  to  date  of  each  piece  of  prop- 
erty, and  the  attempt  to  ascertain  the  same,  would 
probably  involve  a  minimum  expenditure  of  50  mil- 
lions of  dollars.* 

This  brief  outline  of  the  magnitude  of  the  val- 
uation work  will  show  how  difficult,  if  not  impps- 
sible,  it  is  for  a  Commission  of  only  seven  members, 
with  its  manifold  other  duties,  to  give  the  time  to 
the  valuation  work,  which  the  importance  of  the 
subject  demands. 

Before  leaving  the  subject  of  valuation,  it  may 
be  of  interest  to  know  the  position  of  such  of  the 
State  Commissions  as  were  represented  at  the 
recent  argument  before  the  Interstate  Commerce 
Commission,  on  certain  questions  arising  under  the 
Valuation  Act. 

They  contended,  in  substance,  that  the  Inter- 
state Commerce  Commission  should  not  ascertain 
the  value  of  the  property  of  the  carriers,  but  should 
ascertain  simply  the  three  cost  figures  and  other 
detail  required  by  the  Act,  and  leave  for  the  future, 
when  some  rate  case  arises,  the  determination  of 
some  amount,  which  the  Commission,  in  its  then 


*  See  Address  of  Director  Prouty  before  the  National  Association 
of  Railway  Commissioners,  1914,  page  140  of  the  proceedings. 


58 

judgment,  should  fix  as  a  proper  basis  for  rate  reg- 
ulation. 

An  attempt  has  been  made  in  this  paper  to  outline 
the  present  system  of  railroad  regulation,  its  inherent 
defects,  and  to  suggest  for  consideration  certain  reme- 
dies. 

Certainly  there  is  no  question  before  us  to-day 
which  more  vitally  affects  the  economic  develop- 
ment of  the  United  States. 


THIS  BOOK  IS  DUE  ON  THE  LAST  DATE 
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WILL  BE  ASSESSED  FOR  FAILURE  TO  RETURN 
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WILL  INCREASE  TO  5O  CENTS  ON  THE  FOURTH 
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OVERDUE. 


21   1933 


LD  21-50m-l,'3i 


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